Sunday, June 28, 2015

International Valuations of Financial Assets, Mediocre Cyclical United States Economic Growth, Stagnating Real Private Fixed Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income, Financial Repression, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk: Part VII

 

International Valuations of Financial Assets, Mediocre Cyclical United States Economic Growth, Stagnating Real Private Fixed Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income, Financial Repression, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015

I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

II Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

IIA United States Housing Collapse

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

IX Conclusion. Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy grows much faster during the expansion, compensating for the contraction and maintaining trend growth over the entire cycle. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. Lucas sharpens this analysis by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. The key indicator of growth of real income per capita, which is what a person earns after inflation, measures long-term economic growth and prosperity. A refined concept would include real disposable income per capita, which is what a person earns after inflation and taxes.

Table IB-1 provides the data required for broader comparison of long-term and cyclical performance of the United States economy. Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. First, Long-term performance. Using annual data, US GDP grew at the average rate of 3.3 percent per year from 1929 to 2014 and at 3.2 percent per year from 1947 to 2014. Real disposable income grew at the average yearly rate of 3.2 percent from 1929 to 2014 and at 3.7 percent from 1947 to 1999. Real disposable income per capita grew at the average yearly rate of 2.0 percent from 1929 to 2014 and at 2.3 percent from 1947 to 1999. US economic growth was much faster during expansions, compensating contractions in maintaining trend growth for whole cycles. Using annual data, US real disposable income grew at the average yearly rate of 3.5 percent from 1980 to 1989 and real disposable income per capita at 2.6 percent. The US economy has lost its dynamism in the current cycle: real disposable income grew at the yearly average rate of 1.5 percent from 2006 to 2014 and real disposable income per capita at 0.7 percent. Real disposable income grew at the average rate of 1.4 percent from 2007 to 2014 and real disposable income per capita at 0.6 percent. Table IB-1 illustrates the contradiction of long-term growth with the proposition of secular stagnation (Hansen 1938, 1938, 1941 with early critique by Simons (1942). Secular stagnation would occur over long periods. Table IB-1 also provides the corresponding rates of population growth that is only marginally lower at 0.8 to 0.9 percent recently from 1.1 percent over the long-term. GDP growth fell abruptly from 2.6 percent on average from 2000 to 2006 to 1.2 percent from 2006 to 2014 and 1.1 percent from 2007 to 2014 and real disposable income growth fell from 2.9 percent on average from 2000 to 2006 to 1.5 percent from 2006 to 2014. The decline of growth of real per capita disposable income is even sharper from average 2.0 percent from 2000 to 2006 to 0.7 percent from 2006 to 2014 and 0.6 percent from 2007 to 2014 while population growth was 0.8 percent on average. Lazear and Spletzer (2012JHJul122) provide theory and measurements showing that cyclic factors explain currently depressed labor markets. This is also the case of the overall economy. Second, first four quarters of expansion. Growth in the first four quarters of expansion is critical in recovering loss of output and employment occurring during the contraction. In the first four quarters of expansion from IQ1983 to IVQ1983: GDP increased 7.8 percent, real disposable personal income 5.3 percent and real disposable income per capita 4.4 percent. In the first four quarters of expansion from IIIQ2009 to IIQ2010: GDP increased 2.7 percent, real disposable personal income 0.2 percent and real disposable income per capita decreased 0.7 percent. Third, first 23 quarters of expansion. In the expansion from IQ1983 to IIIQ1988: GDP grew 30.9 percent at the annual equivalent rate of 4.8 percent; real disposable income grew 26.3 percent at the annual equivalent rate of 4.1 percent; and real disposable income per capita grew 20.0 percent at the annual equivalent rate of 3.2 percent. In the expansion from IIIQ2009 to IQ2015: GDP grew 13.3 percent at the annual equivalent rate of 2.2 percent; real disposable income grew 12.3 percent at the annual equivalent rate of 2.0 percent; and real disposable personal income per capita grew 6.3 percent at the annual equivalent rate of 1.1 percent. Fourth, entire quarterly cycle. In the entire cycle combining contraction and expansion from IQ1980 to IIIQ1988: GDP grew 30.7 percent at the annual equivalent rate of 3.0 percent; real disposable personal income grew 33.6 percent at the annual equivalent rate of 3.3 percent; and real disposable personal income per capita 23.2 percent at the annual equivalent rate of 2.3 percent. In the entire cycle combining contraction and expansion from IVQ2007 to IQ2015: GDP grew 8.5 percent at the annual equivalent rate of 1.1 percent; real disposable personal income 12.9 percent at the annual equivalent rate of 1.7 percent; and real disposable personal income per capita 6.7 percent at the annual equivalent rate of 0.9 percent. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide strong evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction of 4.2 percent from IVQ2007 to IIQ2009 and the financial crisis. The proposition of secular stagnation should explain a long-term process of decay and not the actual abrupt collapse of the economy and labor markets currently.

Table IB-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population Long-term and in 1983-88 and 2007-2014, %

Long-term Average ∆% per Year

GDP

Population

 

1929-2014

3.3

1.1

 

1947-2014

3.2

1.2

 

1947-1999

3.6

1.3

 

1980-1989

3.5

0.9

 

2000-2014

1.8

0.9

 

2000-2006

2.6

0.9

 

2006-2014

1.2

0.8

 

2007-2014

1.1

0.8

 

Long-term

Average ∆% per Year

Real Disposable Income

Real Disposable Income per Capita

Population

1929-2014

3.2

2.0

1.1

1947-1999

3.7

2.3

1.3

2000-2014

2.1

1.2

0.9

2000-2006

2.9

2.0

0.9

2006-2014

1.5

0.7

0.8

2007-2014

1.4

0.6

0.8

Whole Cycles

Average ∆% per Year

     

1980-1989

3.5

2.6

0.9

2006-2014

1.5

0.7

0.8

2007-2014

1.4

0.6

0.8

Comparison of Cycles

# Quarters

∆%

∆% Annual Equivalent

GDP

     

I83 to IV83

I83 to IQ87

I83 to II87

I83 to III87

I83 to IV87

I83 to I88

I83 to II88

IQ1983 to IIIQ1988

4

17

18

19

20

21

22

23

7.8

23.1

24.5

25.6

27.7

28.4

30.1

30.9

7.8

5.0

5.0

4.9

5.0

4.9

4.9

4.8

RDPI

     

I83 to IV83

I83 to I87

I83 to III87

I83 to IV87

I83 to I88

I83 to II88

I83 to III88

4

17

19

20

21

22

23

5.3

19.5

20.5

22.1

23.8

25.1

26.3

5.3

4.3

4.0

4.1

4.2

4.2

4.1

RDPI Per Capita

     

I83 to IV83

I83 to I87

I83 to III87

I83 to IV87

I83 to I88

I83 to II88

I83 to III88

4

17

19

20

21

22

23

4.4

15.1

15.5

16.7

18.2

19.2

20.0

4.4

3.4

3.1

3.1

3.2

3.2

3.2

Whole Cycle IQ1980 to IIIQ1988

     

GDP

36

30.7

3.0

RDPI

36

33.6

3.3

RDPI per Capita

36

23.2

2.3

Population

36

8.5

0.9

GDP

     

III09 to II10

III09 to I15

4

23

2.7

13.3

2.7

2.2

RDPI

     

III09 to II10

III09 to I15

4

23

0.2

12.3

0.2

2.0

RDPI per Capita

     

III09 to II10

III09 to I15

4

23

-0.7

6.3

-0.7

1.1

Population

     

III09 to II010

III09 to I15

4

23

0.8

4.5

0.8

0.8

IVQ2007 to IQ2015

29

   

GDP

29

8.5

1.1

RDPI

29

12.9

1.7

RDPI per Capita

29

6.7

0.9

Population

29

5.9

0.8

RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

There are seven basic facts illustrating the current economic disaster of the United States:

  • GDP maintained trend growth in the entire business cycle from IQ1980 to IIIQI988, including contractions and expansions. GDP is well below trend in the entire business cycle from IVQ2007 to IQ2015, including contractions and expansions
  • Per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IQ2015
  • Level of employed persons increased in the 1980s but declined/stagnated into IQ2015
  • Level of full-time employed persons increased in the 1980s but declined/stagnated into IQ2015
  • Level unemployed, unemployment rate and employed part-time for economic reasons fell in the recovery from the recessions in the 1980s but not substantially in the recovery since IVQ2009
  • Wealth of households and nonprofit organizations soared in the 1980s but stagnated in real terms into IVQ2014
  • Gross private domestic investment increased sharply from IQ1980 to IIIQ1988 but gross private domestic investment stagnated and private fixed investment stagnated from IVQ2007 into IQ2015

There is a critical issue of the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IB-2 provides data for analysis of these seven basic facts. The seven blocks of Table IB-2 are separated initially after individual discussion of each one followed by the full Table IB-2.

1. Trend Growth.

i. As shown in Table IB-2, actual GDP grew cumulatively 30.2 percent from IQ1980 to IIIQ1988, which is relatively close to what trend growth would have been at 30.5 percent. Real GDP grew 30.7 percent from IVQ1979 to IIIQ1988. Rapid growth at the average annual rate of 4.8 percent per quarter during the expansion from IQ1983 to IIIQ1988 erased the loss of GDP of 4.7 percent during the contractions and maintained trend growth at 3.0 percent for GDP and 3.3 percent for real disposable personal income over the entire cycle.

ii. In contrast, cumulative growth from IVQ2007 to IQ2015 was 8.5 percent while trend growth would have been 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth at average 3.3 percent per year from Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation. The ratio of the labor force of 154.871 million in Jul 2007 to the noninstitutional population of 231.958 million in Jul 2007 was 66.8 percent while the ratio of the labor force of 157.719 million in May 2015 to the noninstitutional population of 250.455 million in May 2015 was 63.0 percent. The labor force of the US in May 2015 corresponding to 66.8 percent of participation in the population would be 167.304 million (0.668 x 250.455). The difference between the measured labor force in May 2015 of 157.719 million and the labor force in May 2015 with participation rate of 66.8 percent (as in Jul 2007) of 167.304 million is 9.585 million. The level of the labor force in the US has stagnated and is 9.585 million lower than what it would have been had the same participation rate been maintained. Millions of people have abandoned their search for employment because they believe there are no jobs available for them. The key issue is whether the decline in participation of the population in the labor force is the result of people giving up on finding another job.

The key issue is whether the decline in participation of the population in the labor force is the result of people giving up on finding another job. Structural change in demography occurs over relatively long periods and not suddenly as shown by Edward P. Lazear and James R. Spletzer (2012JHJul22). There is an abrupt cyclical event and no evidence for secular stagnation and similar propositions.

Period IQ1980 to IIIQ1988

 

GDP SAAR USD Billions

 

    IQ1980

6,524.9

    IIIQ1988

8,498.3

∆% IQ1980 to IIIQ1988 (30.7 percent from IVQ1979 $6503.9 billion)

30.2

∆% Trend Growth IQ1980 to IIIQ1988

30.5

Period IVQ2007 to IQ2015

 

GDP SAAR USD Billions

 

    IVQ2007

14,991.8

    IQ2015

16,264.1

∆% IVQ2007 to IQ2015 Actual

8.5

∆% IVQ2007 to IQ2015 Trend Growth

23.9

2. Stagnating Per Capita Real Disposable Income

i. In the entire business cycle from IQ1980 to IIIQ1988, as shown in Table IB-2, per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 23.2 percent, which is close to what would have been trend growth of 19.5 percent.

ii. In contrast, in the entire business cycle from IVQ2007 to IQ2015, per capita real disposable income increased 6.7 percent while trend growth would have been 15.4 percent. Income available after inflation and taxes is about the same as before the contraction after 23 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions. Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 13.8 percent and real disposable personal income at 11.8 percent (Table 2.1 http://bea.gov/iTable/index_nipa.cfm). The BEA explains as follows: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

In IQ2013, personal income fell at the SAAR of minus 8.6 percent; real personal income excluding current transfer receipts at minus 11.9 percent; and real disposable personal income at minus 12.6 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1014.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

In IIQ2013, personal income grew at 4.5 percent, real personal income excluding current transfer receipts at 4.6 percent and real disposable income at 3.8 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1114.pdf). In IIIQ2013, personal income grew at 3.3 percent, real personal income excluding current transfers at 1.5 percent and real disposable income at 2.0 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0215.pdf). In IVQ2013, personal income grew at 1.8 percent and real disposable income at 0.2 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0415.pdf). In IQ2014, personal income grew at 4.9 percent in nominal terms and 3.2 percent in real terms excluding current transfer receipts while nominal disposable income grew at 4.8 percent and real disposable income at 3.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0415.pdf). In IIQ2014, personal income grew at 4.9 percent and 2.2 percent in real terms excluding current transfers. Nominal disposable income grew at 5.5 percent and at 3.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0415.pdf). In IIIQ2014, personal income grew at 4.2 percent, real personal income excluding current transfers at 2.7 percent and real disposable personal income at 2.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0415.pdf). In IVQ2014, personal income grew at 4.6 percent in nominal terms and at 5.5 percent in real terms excluding current transfers while nominal disposable income grew at 3.7 percent in nominal terms and at 4.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0415.pdf). In IQ2015, nominal personal income grew at 4.1 percent and at 5.3 percent in real terms excluding current transfer receipts while nominal disposable income grew at 3.2 percent and at 5.3 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0415.pdf).

Period IQ1980 to IIIQ1988

 

Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD

20,241

Real Disposable Personal Income per Capita IIIQ1988 Chained 2009 USD

24,917

∆% IQ1980 to IIIQ1988 (21.3 percent from IVQ1979 $20,230)

23.2

∆% Trend Growth

19.5

Period IVQ2007 to IQ2015

 

Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD

35,819

Real Disposable Personal Income per Capita IQ2015 Chained 2009 USD

38,210

∆% IVQ2007 to IQ2015

6.7

∆% Trend Growth

15.4

3. Number of Employed Persons

i. As shown in Table IB-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 115.474 million NSA in IIIQ1988 or by 17.2 percent.

ii. In contrast, during the entire business cycle the number employed stagnated from 146.334 million in IVQ2007 to 147.635 million in IQ2015 or by 0.9 percent higher. There are 25.6 million persons unemployed or underemployed, which is 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). The number employed in Apr 2015 was 148.587 million (NSA) or 1.272 million more people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 250.266 million in Apr 2015 or by 18.308 million. The number employed increased 0.9 percent from Jul 2007 to Apr 2015 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 7.9 percent. The ratio of employment to population in Jul 2007 was 63.5 percent (147.315 million employment as percent of population of 231.958 million). The same ratio in Apr 2015 would result in 158.919 million jobs (0.635 multiplied by noninstitutional civilian population of 250.266 million). There are effectively 10.332 million fewer jobs in Apr 2015 than in Jul 2007, or 158.919 million minus 148.587 million. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

Period IQ1980 to IIIQ1988

 

Employed Millions IQ1980 NSA End of Quarter

98.527

Employed Millions IIIQ1988 NSA End of Quarter

115.474

∆% Employed IQ1980 to IIQ1988

17.2

Period IVQ2007 to IQ2015

 

Employed Millions IVQ2007 NSA End of Quarter

146.334

Employed Millions IQ2015 NSA End of Quarter

147.635

∆% Employed IVQ2007 to IQ2015

0.9

4. Number of Full-Time Employed Persons

i. As shown in Table IB-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 96.033 million NSA in IIIQ1988 or 18.2 percent.

ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time fell from 121.042 million in IVQ2007 to 119.981 million in IQ2015 or by minus 0.9 percent. The number with full-time jobs in Apr 2015 is 120.402 million, which is lower by 2.817 million relative to the peak of 123.219 million in Jul 2007. The magnitude of the stress in US labor markets is magnified by the increase in the civilian noninstitutional population of the United States from 231.958 million in Jul 2007 to 250.266 million in Apr 2015 or by 18.308 million (http://www.bls.gov/data/) while in the same period the number of full-time jobs fell 2.817 million. The ratio of full-time jobs of 123.219 million Jul 2007 to civilian noninstitutional population of 231.958 million was 53.1 percent. If that ratio had remained the same, there would be 132.891 million full-time jobs with population of 250.266 million in Apr 2015 (0.531 x 250.266) or 12.489 million fewer full-time jobs relative to actual 120.402 million. There appear to be around 10 million fewer full-time jobs in the US than before the global recession while population increased around 18 million.

4. Number of Full-time Employed Persons

Period IQ1980 to IIIQ1988

 

Employed Full-time Millions IQ1980 NSA End of Quarter

81.280

Employed Full-time Millions IIIQ1988 NSA End of Quarter

96.033

∆% Full-time Employed IQ1980 to IIIQ1988

18.2

Period IVQ2007 to IQ2015

 

Employed Full-time Millions IVQ2007 NSA End of Quarter

121.042

Employed Full-time Millions IQ2015 NSA End of Quarter

119.981

∆% Full-time Employed IVQ2007 to IQ2015

-0.9

5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.

i. As shown in Table IB-2 and in the following block, in the cycle from IQ1980 to IIQ1988: (a) The rate of unemployment was lower at 5.2 percent in IIIQ1988 relative to 6.6 percent in IQ1980. (b) The number unemployed decreased from 6.983 million in IQ1980 to 6.368 million in IIIQ1988 or 8.8 percent. (c) The number employed part-time for economic reasons increased 29.8 percent from 3.624 million in IQ1980 to 4.704 million in IIIQ1988.

ii. In contrast, in the economic cycle from IVQ2007 to IQ2015: (a) The rate of unemployment increased from 4.8 percent in IVQ2007 to 5.6 percent in IQ2015. (b) The number unemployed increased 17.8 percent from 7.371 million in IVQ2007 to 8.682 million in IQ2015. (c) The number employed part-time for economic reasons because they could not find any other job increased 40.5 percent from 4.750 million in IVQ2007 to 6.672 million in IQ2015. (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 11.0 percent in IQ2015.

Period IQ1980 to IIIQ1988

 

Unemployment Rate IQ1980 NSA End of Quarter

6.6

Unemployment Rate  IIIQ1988 NSA End of Quarter

5.2

Unemployed IQ1980 Millions End of Quarter

6.983

Unemployed IIIQ1988 Millions End of Quarter

6.368

∆%

-8.8

Employed Part-time Economic Reasons Millions IQ1980 End of Quarter

3.624

Employed Part-time Economic Reasons Millions IIIQ1988 End of Quarter

4.704

∆%

29.8

Period IVQ2007 to IQ2015

 

Unemployment Rate IVQ2007 NSA End of Quarter

4.8

Unemployment Rate IQ2015 NSA End of Quarter

5.6

Unemployed IVQ2007 Millions End of Quarter

7.371

Unemployed IQ2015 Millions End of Quarter

8.682

∆%

17.8

Employed Part-time Economic Reasons IVQ2007 Millions End of Quarter

4.750

Employed Part-time Economic Reasons Millions IQ2015 End of Quarter

6.672

∆%

40.5

U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA

 

IVQ2007

8.7

IQ2015

11.0

6. Wealth of Households and Nonprofit Organizations.

The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IIIQ1988 and from IVQ2007 to IQ2015 is provided in Table IIA-5. The data reveal the following facts for the cycles in the 1980s:

  • IVQ1979 to IIIQ1988. Net worth increased 112.3 percent from IVQ1979 to IIIQ1988, the all items CPI index increased 56.2 percent from 76.7 in Dec 1979 to 119.8 in Sep 1988 and real net worth increased 35.9 percent.
  • IQ1980 to IVQ1985. Net worth increased 65.4 percent, the all items CPI index increased 36.5 percent from 80.1 in Mar 1980 to 109.3 in Dec 1985 and real net worth increased 21.2 percent.
  • IVQ1979 to IVQ1985. Net worth increased 68.8 percent, the all items CPI index increased 42.5 percent from 76.7 in Dec 1979 to 109.3 in Dec 1985 and real net worth increased 18.5 percent.
  • IQ1980 to IIIQ1988. Net worth increased 107.9 percent, the all items CPI index increased 49.6 percent from 80.1 in Mar 1980 to 119.8 in Sep 1988 and real net worth increased 39.0 percent.

There is disastrous performance in the current economic cycle:

  • IVQ2007 to IQ2015. Net worth increased 27.3 percent, the all items CPI increased 12.4 percent from 210.036 in Dec 2007 to 236.119 in Mar 2015 and real or inflation adjusted net worth increased 13.2 percent. Real estate assets adjusted for inflation fell 8.1 percent.

The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 23 quarters from IIIQ2009 to IQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth at average 3.3 percent per year from May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 percent below trend under this alternative calculation.

Period IQ1980 to IIQ1988

 

Net Worth of Households and Nonprofit Organizations USD Millions

 

IVQ1979

IQ1980

9,047.8

9,238.6

IVQ1985

IIIQ1986

IVQ1986

IQ1987

IIQ1987

IIIQ1987

IVQ1987

IQ1988

II1988

III1988

15,277.2

16,290.7

16,840.2

17,494.6

17,784.0

18,195.2

18,021.9

18,459.1

18,900.1

19,209.2

∆ USD Billions IVQ1985

IVQ1979 to IIIQ1988

IQ1980-IVQ1985

IQ1980-IIIQ1986

IQ1980-IVQ1986

IQ1980-IQ1987

IQ1980-IIQ1987

IQ1980-IIIQ1987

IQ1980-IVQ1987

IQ1980-IQ1988

IQ1980-IIQ1988

IQ1980-IIIQ1988

+6,229.4  ∆%68.8 R∆%18.5

+10161.4  ∆%112.3 R∆%35.9

+6,038.6 ∆%65.4 R∆%21.2

+7,052.1 ∆%76.3 R∆%28.2

+7,601.6 ∆%82.3 R∆%32.1

+8,256.0 ∆%89.4 R∆%35.3

+8,545.4 ∆%92.5 R∆%35.9

+8,956.6 ∆%96.9 R∆%37.2

+8783.2 ∆%95.1 R∆%35.4

+9256.5 ∆%100.2 R∆%37.6

+9661.5 ∆%104.6 R∆%38.9

+9970.6 ∆%107.9 R∆%39.0

Period IVQ2007 to IQ2015

 

Net Worth of Households and Nonprofit Organizations USD Millions

 

IVQ2007

66,721.8

IQ2015

84,924.6

∆ USD Billions

+18,202.8 ∆%27.3 R∆%13.2

Net Worth = Assets – Liabilities. R∆% real percentage change or adjusted for CPI percentage change.

Source: Board of Governors of the Federal Reserve System. 2015. Flow of funds, balance sheets and integrated macroeconomic accounts: first quarter 2015. Washington, DC, Federal Reserve System, Jun 11. http://www.federalreserve.gov/releases/z1/.

7. Gross Private Domestic Investment.

i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IIIQ1988 and from IVQ2007 to IQ2015 is in the following block and in Table IB-2. Gross private domestic investment increased from $951.6 billion in IQ1980 to $1,229.7 billion in IIIQ1988 or by 29.2 percent.

ii In the current cycle, gross private domestic investment increased from $2,605.2 billion in IVQ2007 to $2,781.0 billion in IQ2015, or 6.7 percent. Private fixed investment edged from $2,586.3 billion in IVQ2007 to $2,664.2 billion in IQ2015, or increase by 3.0 percent.

Period IQ1980 to IIIQ1988

 

Gross Private Domestic Investment USD 2009 Billions

 

IQ1980

951.6

IIIQ1988

1,229.7

∆%

29.2

Period IVQ2007 to IQ2015

 

Gross Private Domestic Investment USD Billions

 

IQ2007

2,605.2

IQ2015

2,781.0

∆%

6.7

Private Fixed Investment USD 2009 Billions

 

IVQ2007

2,586.3

IQ2015

2,664.2

∆%

3.0

Table IB-2, US, GDP and Real Disposable Personal Income per Capita Actual and Trend Growth and Employment, 1980-1985 and 2007-2012, SAAR USD Billions, Millions of Persons and ∆%

   

Period IQ1980 to IIIQ1988

 

GDP SAAR USD Billions

 

    IQ1980

6,524.9

    IIIQ1988

8,498.3

∆% IQ1980 to

IIIQ1988 (30.7 percent from IVQ1979 $6503.9 billion)

30.2

∆% Trend Growth IQ1980 to IIIQ1988

30.5

Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD

20,241

Real Disposable Personal Income per Capita IIIQ1988 Chained 2009 USD

24,917

∆% IQ1980 to IIIQ1988 (22.3 percent from IVQ1979 $20,230 billion)

23.2

∆% Trend Growth

19.5

Employed Millions IQ1980 NSA End of Quarter

98.527

Employed Millions IIIQ1988 NSA End of Quarter

115.474

∆% Employed IQ1980 to IIIQ1988

17.2

Employed Full-time Millions IQ1980 NSA End of Quarter

81.280

Employed Full-time Millions IIIQ1988 NSA End of Quarter

96.033

∆% Full-time Employed IQ1980 to IQ1II988

18.2

Unemployment Rate IQ1980 NSA End of Quarter

6.6

Unemployment Rate  IIIQ1988 NSA End of Quarter

5.2

Unemployed IQ1980 Millions NSA End of Quarter

6.983

Unemployed IIIQ1988 Millions NSA End of Quarter

6.368

∆%

-8.8

Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter

3.624

Employed Part-time Economic Reasons Millions IIIQ1988 NSA End of Quarter

4.704

∆%

29.8

Net Worth of Households and Nonprofit Organizations USD Billions

 

IVQ1979

9,047.8

IIIQ1988

19,209.2

∆ USD Billions

+10,161.4

∆% CPI Adjusted

35.9

Gross Private Domestic Investment USD 2009 Billions

 

IQ1980

951.6

IIIQ1988

1229.7

∆%

29.2

Period IVQ2007 to IQ2015

 

GDP SAAR USD Billions

 

    IVQ2007

14,991.8

    IQ2015

16,264.1

∆% IVQ2007 to IQ2015

8.5

∆% IVQ2007 to IQ2015 Trend Growth

23.9

Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD

35,819

Real Disposable Personal Income per Capita IQ2015 Chained 2009 USD

38,210

∆% IVQ2007 to IQ2015

6.7

∆% Trend Growth

15.4

Employed Millions IVQ2007 NSA End of Quarter

146.334

Employed Millions IQ2015 NSA End of Quarter

147.635

∆% Employed IVQ2007 to IQ2015

0.9

Employed Full-time Millions IVQ2007 NSA End of Quarter

121.042

Employed Full-time Millions IQ2015 NSA End of Quarter

119.981

∆% Full-time Employed IVQ2007 to IQ2015

-0.9

Unemployment Rate IVQ2007 NSA End of Quarter

4.8

Unemployment Rate IQ2015 NSA End of Quarter

5.6

Unemployed IVQ2007 Millions NSA End of Quarter

7.371

Unemployed IQ2015 Millions NSA End of Quarter

8.682

∆%

17.8

Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter

4.750

Employed Part-time Economic Reasons Millions IQ2015 NSA End of Quarter

6.672

∆%

40.5

U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA

 

IVQ2007

8.7

IQ2015

11.0

Net Worth of Households and Nonprofit Organizations USD Billions

 

IVQ2007

66,721.8

IQ2015

84,924.6

∆ USD Billions

+18,202.8 ∆%27.3 R∆%13.2

Gross Private Domestic Investment USD Billions

 

IVQ2007

2,605.2

IQ2015

2,790.1

∆%

7.1

Private Fixed Investment USD 2009 Billions

 

IVQ2007

2,586.3

IQ2015

2,664.2

∆%

3.0

Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm US Bureau of Labor Statistics http://www.bls.gov/data/. Board of Governors of the Federal Reserve System. 2015. Flow of funds, balance sheets and integrated macroeconomic accounts: fourth quarter 2014. Washington, DC, Federal Reserve System, Mar 12.

The Congressional Budget Office (CBO 2014BEOFeb4) estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2014 at 3.3 percent per year. The projected path is significantly lower at 2.1 percent per year from 2015 to 2025. The legacy of the economic cycle expansion from IIIQ2009 to IQ2015 at 2.2 percent on average is in contrast with 4.8 percent on average in the expansion from IQ1983 to IIIQ1988 (http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 24.7 million or 14.9 percent of the effective labor force in May 2015 (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html) with much lower hiring than in the period before the current cycle (http://cmpassocregulationblog.blogspot.com/2015/06/volatility-of-financial-asset.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/fluctuating-valuations-of-financial.html).

Table IB-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%

 

Potential GDP

Potential Labor Force

Potential Labor Productivity*

Average Annual ∆%

     

1950-1973

4.0

1.6

2.4

1974-1981

3.3

2.5

0.8

1982-1990

3.2

1.6

1.6

1991-2001

3.2

1.3

1.9

2002-2007

2.8

0.9

1.9

2008-2014

1.4

0.5

0.9

Total 1950-2014

3.3

1.5

1.8

Projected Average Annual ∆%

     

2015-2019

2.1

0.5

1.6

2019-2025

2.2

0.6

1.6

2015-2025

2.1

0.5

1.6

*Ratio of potential GDP to potential labor force

Source: CBO (2014BEOFeb4), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

Chart IB-1A of the Congressional Budget Office provides historical and projected potential and actual US GDP. The gap between actual and potential output closes by 2017. Potential output expands at a lower rate than historically. Growth is even weaker relative to trend.

clip_image001

Chart IB-1A, Congressional Budget Office, Estimate of Potential GDP and Gap

Source: Congressional Budget Office

https://www.cbo.gov/publication/49890

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.2 percent on average from IIIQ2009 to IQ2015 during the current economic expansion in contrast with 4.8 percent on average in the cyclical expansion from IQ1983 to IIIQ1988 (http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html) cannot be explained by the contraction of 4.2 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 24.7 million or 14.9 percent of the labor force as estimated for May 2015 (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2015/06/volatility-of-financial-asset.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/fluctuating-valuations-of-financial.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

clip_image003

Chart IB-1, US, Congressional Budget Office, Actual and Projections of Potential GDP, 2000-2024, Trillions of Dollars

Source: Congressional Budget Office, CBO (2013BEOFeb5). The last year in common in both projections is 2017. The revision lowers potential output in 2017 by 7.3 percent relative to the projection in 2007.

Chart IB-2 provides differences in the projections of potential output by the CBO in 2007 and more recently on Feb 4, 2014, which the CBO explains in CBO (2014Feb28).

clip_image005

Chart IB-2, Congressional Budget Office, Revisions of Potential GDP

Source: Congressional Budget Office, 2014Feb 28. Revisions to CBO’s Projection of Potential Output since 2007. Washington, DC, CBO, Feb 28, 2014.

Chart IB-3 provides actual and projected potential GDP from 2000 to 2024. The gap between actual and potential GDP disappears at the end of 2017 (CBO2014Feb4). GDP increases in the projection at 2.5 percent per year.

clip_image007

Chart IB-3, Congressional Budget Office, GDP and Potential GDP

Source: CBO (2013BEOFeb5), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014.

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